Africa Savings Datapoint of the Day

Anke and I have estimated the proportion of Africa’s private wealth that is held outside the region. By 2004 it had reached the astounding figure of 36 percent: more than a third of Africa’s own wealth is outside the region.

If I’m astounded by the 36% figure, that’s because it’s so low, not because it’s so high. It makes sense for anybody with wealth to diversify geographically; it makes much more sense for Africans, where domestic wealth can be arbitrarily frozen or confiscated at any time. Indeed, an entire industry of Nigerian 419 scammers has arisen on the back of the existence of precisely such policies.

Alan Stanford, too, made his billions largely thanks to the risk of confiscatory domestic policies: the plurality of his deposits came from Venezuelans fearful that Hugo Chávez would freeze or repurpose any of their wealth held domestically, and in general the customers of Stanford International Bank were people who thought that its offshore status was a feature, not a bug.

The middle classes in developing nations often face enormous practical difficulties — not to mention foreign-exchange risk — if they want to diversify internationally. It’s not easy for the average Brazilian to open a brokerage account in Miami, although it’s commonplace for the Brazilian elite. But in Africa, of course, the middle class is tiny: the overwhelming majority of the country’s investable wealth is held by a very small elite class of individuals. Those individuals have every incentive to park their money abroad, especially in no-questions-asked jurisdictions.

None of this is good for African development — high domestic savings rates are a key driver of domestic growth, and sending one’s money off to Switzerland or Cyprus isn’t going to help the development of the Ivory Coast. It’s a tragedy of the commons: it makes sense for any given individual to keep his money abroad, but when everybody does that, it harms the country enormously. So color me cautiously upbeat about the fact that 64% of Africa’s private wealth is still invested inside the region. One can hope that number will grow, of course, but I don’t think it’s at present devastatingly low.